When did the culture of ‘money mania’ start? When did people first set out to grab as much money as possible at whatever cost? When did the momentum for credit creation —paper money calling for more money — become unstoppable?

Let us contrast the past 30 years with the years 1880-1910. Under the classical gold standard gold was money and money was gold, the mark of a civilised society. Thus when people say that going back to gold was a mistake in the 1920s, they are correct but unhistorical: almost everybody believed it had to be tried, even Keynes’s disagreement was practical, to do with the price rather than the principle (he wanted a somewhat lower exchange rate).

It was seen as the key to restoring stability.

That went also with a certain set of attitudes and ethics towards money. Our problem is, when society rejected gold (or, as some would have it, grew out of it) it also lost the sense of what nasty things money, let loose, can do.

Has society changed so as to make the standards that accompanied the gold standard redundant? Remember the phrase “the permissive society”? The 1960s rebellion of youth was said to be leftwing – but in fact led to more individualistic attitudes and lifestyles generally. It is amusing but telling to see that Dan Cohn-Bendit (known as “Danny the Red” for his political views as well as hair colour) who at the time was seen as a latter-day “Robespierre” leading the students to the barricades in Paris in 1968, is now advising right-of-centre President Macron!

Floating of the pound by Tony Barber, the British Chancellor of the Exchequer, in 1972, was as much a sign of the times as the US abandonment of gold a year earlier. (Sterling has since collapsed against the dollar from $2.6 to $1.3, while the dollar itself has lost most of its purchasing power value, as the US price level has soared). The 1980s was when it all came to fruition in financial market behaviour – after Nigel Lawson, another British Tory Chancellor, abolished exchange controls in 1979, the worldwide movement to liberalise markets, privatisation, etc.

The third world debt crisis of the 1980s, which seemed at the time a big setback for “globalisation” was actually a stage in its inexorable advance. But it was that decade that also sowed the seeds of the collapse of 2008. To replace both the moral code and economic discipline of gold and of fixed rates seems impossible – the euro has tried to do the latter while neglecting the former.

When gold was a sign of civilisation

Why and how did gold in the 19th century become a sign of a civilised society? There were technical reasons why all leading countries quite quickly joined the gold standard between 1850 and 1900. Gold discoveries made gold more plentiful. There were problems with bimetallism. But it was also seen as a sign of good housekeeping – like an IMF seal of approval today, or better. Investors knew where they were when a country was on gold – and the dominant supply of investment came from Britain.

So the country exported its Victorian way of life, which was “civilised”, or supposed to be, around the world, along with its ideas of property rights, its ships and railways, tourists and grand hotels.

The City of London was the world financial centre and enormously powerful but always knew that it was the government that ran the political side and respected that. Bankers did not have high social status. Retail banks were run by grammar/secondary school boys, leaving school at 16, as indeed were the clearing banks right into the 1960s; while the merchant banks were often owned by outsiders – families anxious to get into British society, which meant country life, shooting and fishing and big estates. The first thing you did when you had made enough money was to distance yourself from it, as City boys who have made their pile still do to this day. You would buy art, send the boys to Eton, patronise charities and dress up in country garb. In the competitive search for social honour it did not help to have a history of scandal or shady dealing in the City – people got to hear about it.

It was also about free trade. The British took a risk with the repeal of the Corn Laws in the 1840s. It would only work if they could persuade others to follow suit, adopt gold, buy British manufactured goods and let capital as well as trade move freely (of course there were no passports either, at least for Brits), so you had free movement of good, capital and people. All marks of self-confident, optimistic societies. Which just goes to show what a gloomy and insecure society the Brits have become. Then they created an entire mythology around gold. This made people expect it would last for ever. Even though experts knew it was quite recent, by 1900 the system was expected to endure, something we can barely grasp. It was for some a kind of religion.

It was in a way religious. They feared money, like they feared the God of the Old Testament. Money had its laws, its prophets, its tablets of stone which had to be obeyed. If not respected, money could unleash havoc. We lost that respect in the 1970s and 1980s. Ironically, this happened just at a time when bankers were successfully re-creating a global economic and monetary system more integrated than anything since 1914.

The bankers re-created the fabric – the monetary links and network – equivalent to that of the late 19th century gold standard but they did not resurrect the laws and moral codes that gave it inner strength and flexibility.

Stages down the slippery slope included

a. “the Greenspan put”, a term that dates back to the Fed’s support for stock market creditors and liquidity in 1987 (taken as a sign that it would always inject liquidity whenever stocks fell heavily),

b. the abandonment of the Glass-Steagall philosophy at the end of the century – mixing up short term finance (clearing/commercial banking) and long term finance (investment banking) which was supported by the Fed under Greenspan.

c. the unwise rescue of the Long-Term Capital Management orchestrated by the New York Fed in 1999. The Fed was implicated in all of these – not to mention

d. a cavalier attitude on the part of the Fed’s Board of Governors in Washington and other central banks to their supervisory functions, which always played second fiddle to monetary policy.

This is not to excuse the bankers.

Predators on top

In banking, the changes started in the early 1970s when it became fashionable to argue that the main objective of management was to enhance shareholder value and that anything done for another purpose was a betrayal of the owners. That set the stage for proprietary trading, bonuses based on volume, and denigration of community activities. Charities shifted their objective to “value-enhancing giving”.

Now it’s a jungle, where the bankers who rise to the top are the predators.

Events and attempted reforms since the crisis suggest we have learnt little. We would do well to study how society managed to tame finance 120 years ago.

As regards monetary policy, is there any reason to believe that central bankers know any better now than their predecessors or governments did in the 1970s when it will be time to raise interest rates?

Markets are betting that they will again keep rates too low for too long.

Keeping rates too low again?

In an article written in April 2014, before he retired from the FT, Sir Samuel Brittan, the paper’s great economics guru, compared the situation with that facing the UK in the Barber boom, which ended in super-fast inflation and Britain going cap in hand to the IMF:

“The trouble is that there is no real criterion for what is too fast. The big difference is that the ball is now in the court of the monetary policy committee (MPC). It will be up to the MPC to take action if it feels that the boom is getting out of hand. I wish I could feel more confident that it will know what to do, given the lack of any ultimate yardstick, whether nominal GDP or the inflation rate”.